Consumption Risk and Cross-Sectional Returns / Jonathan A. Parker, Christian Julliard.

Format:

Book

Author/Creator:

Parker, Jonathan A.

Contributor:

National Bureau of Economic Research.

Julliard, Christian.

Series:

Working Paper Series (National Bureau of Economic Research) no. w9538.

NBER working paper series no. w9538

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2003.

Summary:

This paper evaluates the central insight of the Consumption Capital Asset Pricing Model (C-CAPM) that an asset's expected return is determined by its equilibrium risk to consumption. Rather that measure the risk of a portfolio by the contemporaneous covariance of its return and consumption growth -- as done in the previous literature on the C-CAPM and the pattern of cross-sectional returns -- we measure the risk of a portfolio by its ultimate consumption risk defined as the covariance of its return and consumption growth over the quarter of the return and many following quarters. While contemporaneous consumption risk has little predictive power for explaining the pattern of average returns across the Fama and French (25) portfolios, ultimate consumption risk is highly statistically significant in explaining average returns and explains a large fraction of the variation in average returns. Aditionally, estimates of the average risk-free real rate of interest and the coefficient of relative risk aversion of the representative household based on ultimate consumption risk are more reasonable than those obtained using contemporaneous consumption risk.

Notes:

Print version record

March 2003.